COURT FILE NO.: CV-14-10740-00CL
DATE: 20151119
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERICAL LIST)
IN THE MATTER OF Rule 14.05(3) (h) of the Rules of Civil Procedure
BETWEEN:
THE CANADA LIFE INSURANCE COMPANY OF CANADA
Applicant
– and –
ATTORNEY GENERAL OF CANADA and HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO
Respondents
James Doris and Stephen S. Ruby, for the Applicant
Adam Gotfried and Alisa Apostle, for the Respondent, the Attorney General of Canada
HEARD: January 13 and February 21, 2015
L. A. PATTILLO J.:
[1] This is an application by The Canada Life Insurance Company of Canada (“CLICC”) for an order rectifying a series of transactions and events carried out by it in December 2007 (the “December 2007 Transactions”), nunc pro tunc along with a number of ancillary orders to effect the rectification.
[2] The application was opposed by the respondent the Attorney General of Canada (“AGC”) for and on behalf of the Canada Revenue Agency (“CRA”). The Legal Services Branch of the Ministry of the Attorney General advised the court that the Director under the Ontario Business Corporations Act takes no position on the application and did not intend to appear.
[3] The application was argued before me on January 13, 2015, following which I reserved my decision. Shortly thereafter, the applicant contacted the court and advised that it wished to bring a motion to amend its application to put forward an alternative way by which the December 2007 Transactions could be rectified.
[4] Despite the AGC’s objections, I scheduled CLICC’s amendment motion which was subsequently heard by me on February 21, 2015 and also reserved.
[5] For the reasons that follow, I allow CLICC’s application to rectify the December 2007 Transactions. In my view, the requirements for rectification as set out in Juliar v. Canada (Attorney-General) (1999), 1999 15097 (ON SC), 46 O.R. (3d) 104 (Ont. S.C.J.); aff’d (2000), 2000 16883 (ON CA), 50 O.R. (3d) 728 (C.A.); leave to appeal to the Supreme Court of Canada denied [2000] S.C.C.A No. 621 have been met by CLICC.
[6] In light of my conclusion that CLICC’s application should be allowed, there is no need for CLICC’s requested amendment. CLICC’s motion to amend its notice of application is therefore dismissed.
Background
[7] The following facts are not in dispute.
The Corporate Structure
[8] CLICC is an insurance company incorporated under the Insurances Companies Act (Canada) (the “Insurance Act”). It is a direct, wholly-owned subsidiary of The Canada Life Assurance Company (“CLA”) which is in turn an indirect wholly-owned subsidiary of Great-West Life Assurance Company (“GWL”). At the material times, all three companies each carried on an insurance business. GWL and CLA issue insurance policies to the public and CLICC is engaged in reinsurance.
[9] Mountain Asset Management LP (“MAM LP”) was a limited partnership formed on March 29, 2007 under the Limited Partnerships Act R.S.O. 1990, c. L-16, as amended. CLICC was the limited partner owning a 99% interest and CLICC GP, an Ontario company and a direct wholly-owned subsidiary of CLICC, owned the remaining 1% interest.
[10] MAM Holdings Inc. (“MAM Holdings”) is an Ontario company owned 5.575% by GWL and 94.425% by MAM LP.
[11] Mountain Asset Management LLC (“MAM LLC”) is a Delaware company and is a direct wholly-owned subsidiary of MAM Holdings.
The Reinsurance Agreements
[12] Since the beginning of 2003, CLA and CLICC have been parties to a reinsurance agreement pursuant to which CLICC reinsured, by way of indemnity insurance, the obligations of CLA under certain insurance policies (the “CLA Reinsurance Agreement”).
[13] In April 2007, GWL and CLICC entered into a reinsurance agreement pursuant to which CLICC reinsured, by way of indemnity reinsurance, the obligations of GWL under certain insurance policies (the “GWL Reinsurance Agreement”). In partial payment of the premium, GWL transferred approximately $3.5 billion of investment assets that matched approximately $3.5 billion of insurance liabilities that had been assumed by CLICC under the GWL Reinsurance Agreement. The $3.5 billion of investment assets included a portfolio of U.S. dollar bonds having a face value of approximately Cdn. $1.27 billion (the “U.S. Bond Portfolio”).
[14] After receiving the $3.5 billion of investment assets from GWL, CLICC held a portfolio of assets having a value of approximately $8.2 billion which supported obligations to CLA and GWL under the reinsurance agreements with both CLA and GWL.
[15] Commencing on April 2, 2007, CLICC, CLICC LP, CLICC GP and GWL implemented transactions pursuant to which they indirectly invested approximately $1.345 billion in MAM LLC, including the U.S. Bond Portfolio.
[16] Attached as Appendix “A” is a chart showing the corporate ownership structure of MAM LLC as of December 6, 2007 (just prior to the implementation of the transactions at issue).
The Hedge Contracts
[17] CLICC’s interest in MAM LP directly supported certain of CLICC’s obligations under the reinsurance agreements. While those obligations were in Canadian dollars, the value of CLICC’s partnership interest in MAM LP reflected the value of MAM LP’s indirect interest in MAM LLC, which in turn reflected the value of the U.S. Bond Portfolio and other U.S. dollar denominated investments held by MAM LLC.
[18] Accordingly, because CLICC was indirectly holding the U.S. Bond Portfolio and other U.S. dollar denominated investments through its indirect interest in MAM LLC, CLICC entered into third party hedge contracts (the “Hedge Contracts”) with arm’s length financial institutions to hedge and thus eliminate any foreign exchange risk resulting from changes to the Canadian dollar/U.S. dollar exchange rate. The purpose of the Hedge Contracts was to generally ensure effective matching of its assets and its obligations under the reinsurance agreements.
[19] During the last three quarters of CLICC’s 2007 taxation year ending December 31, 2007, the U.S. dollar depreciated significantly relative to the Canadian dollar. Due primarily to the decrease in the value of the U.S. dollar compared to the value of the Canadian dollar, for Canadian financial reporting and tax purposes, by early December 2007:
a) CLICC had accrued and unrealized losses on its interest in MAM LP due to the decline in the value of the U.S. dollar in the approximate amount of $168 million; and
b) CLICC had accrued and unrealized gains in the Hedge Contracts related to the same decline in value of the U.S. dollar in the approximate amount of $168 million.
[20] The problem for CLICC was that the accumulated and unrealized losses and gains in the Hedge Contracts resulted in a mismatch for Canadian tax purposes. The unrealized foreign exchange gains accrued in respect of the Hedge Contracts during CLICC’s 2007 taxation year were required to be recognized by CLICC on an accrual basis in 2007 while the corresponding unrealized foreign exchange loss inherent in CLICC’s interest in MAM LP would not be recognized by CLICC in the same taxation year unless it was actually realized in that year. Accordingly, CLICC would be subject to tax on the accrued foreign exchange gains and unable to match the foreign exchange losses against those gains.
The December 2007 Transactions
[21] In order to offset the gains to avoid taxation, in early December, 2007, CLICC, CLICC GP, MAM LP and MAM Holdings entered into the December 2007 Transactions which consisted of the following:
On December 6, 2007, at 2:00 p.m. (Central Time), MAM Holdings declared a dividend of $44,800,645 on its common shares, payable on December 7, 2007.
Immediately following MAM Holdings declaration of the dividend, it paid the dividend to GWL in respect of its 5.575% interest ($2,497,636) and to MAM LP in respect of its 94.425% interest ($42,303,009).
On December 7, 2007 at 3:00 p.m. (Central Time), MAM LP distributed its MAM Holdings shares to its partners CLICC and CLICC GP based on their 99% and 1% interests respectively.
On December 31, 2007 at 3:00 p.m. (Eastern Time), the rights and interests of CLICC and CLICC GP in MAM LP were cancelled and extinguished and MAM LP distributed all of its property (except for $100 of limited partnership capital), pro rata, to CLICC and CLICC GP. The distributed property consisted of the following:
i) A promissory note issued by MAM Holdings having a principal amount of $952,728,964; and
ii) Short term securities and cash having a value of $42,387,295.
On December 31, 2007 at 4:00 p.m. (Eastern Time), MAM LP was dissolved and immediately thereafter, the remaining $100 of partnership capital was distributed, pro rata, to CLICC and CLICC GP.
On December 31, 2007 at 11:59 p.m. (Eastern Time), CLICC GP was wound up and its assets and liabilities were acquired and assumed by CLICC.
By Certificate of Dissolution dated October 14, 2008, CLICC GP was formally dissolved.
[22] The result of the December 2007 Transactions was that CLICC suffered a loss arising from the disposition of its 99% limited partnership interest in MAM LP in the amount of $168,336,234 (the difference between $952,728,964 which is what CLICC received for its 99% interest in MAM LP and $1,153,501,330 which was the cost of CLICC’s interest in MAM LP for tax purposes).
[23] In its income tax return for its 2007 taxation year ending December 31, 2007, CLICC included in income the realized and unrealized gains from the Hedge Contracts and deducted a corresponding amount in respect of the loss realized by its disposition of its 99% interest in MAM LP by reason of the dissolution of MAM LP.
CRA Reassessment
[24] On July 16, 2012, CRA issued a reassessment to CLICC for its 2007 taxation year pursuant to which it disallowed CLICC’s claim for the loss of approximately $168 million on the basis that subsection 98(5) of the Income Tax Act (“ITA”) applied on the basis that MAM LP’s dissolution was not affected on a taxable basis but was effected on a “rollover” or “tax-deferred” basis.
[25] Subsection 98(5) of the ITA is a “rollover” provision which provides that, on the dissolution of a partnership, a former partner will be deemed to have disposed of its partnership interest for proceeds equal to the tax cost of such interest to such former partner (i.e., without realizing a gain or a loss) if each of the following three conditions are satisfied:
Within three months of the time of the dissolution of the partnership, the former partner carries on the business that was the business of the partnership;
The former partner continues to use in the course of carrying on that business any property that was, immediately before the time of the dissolution of the partnership, partnership property that was received by the former partner as proceeds of disposition for the former partner’s interest in the partnership; and
The former partner is the only former partner that meets the conditions described in 1 and 2 above.
[26] By Notice of Objection dated October 12, 2012, CLICC objected to the reassessment and stated therein, among other things, that it would be making application to the Superior Court of Justice for an order rectifying the December 2007 Transactions with the result that subsection 98(5) of the ITA would not apply to prevent CLICC from realizing the tax loss of approximately $168 million.
The Rectification Order
[27] The rectification order sought by CLICC in this application effectively involves the cancellation of the December 2007 Transactions dissolving MAM LP and winding up CLICC GP and replacing them with a series of transactions that dissolve MAM LP as at December 31, 2007 in a way that s. 98(5) of the ITA does not apply (the “Proposed Transactions”).
[28] Specifically, CLICC seeks to rectify the December 2007 Transactions through the issuance of the following Proposed Transactions:
- Cancellation, nunc pro tunc, of the December 2007 Transactions which took place on December 31, 2007 as set out in paragraph 20, subparagraphs 4, 5 and 6 herein;
Rectification of Dissolution of MAM LP
Effective at 4:00 p.m. (Central Time) on December 31, 2007 CLICC shall be deemed to have sold its 99% interest in MAM Holdings to CLICC GP in consideration of CLICC GP shares having an aggravate fair market value equal to the aggregate fair market value of CLICC’s shares;
At the same time, CLICC GP shall be deemed to have issued to CLICC the requisite number of common shares to effect the purchase in subparagraph 2 and to have increased the stated capital account of its common shares by $1 pursuant to s. 24(3) of the OBCA;
Effective at 2:00 p.m. (Eastern Time) on December 31, 2007, MAM LP shall be deemed to have distributed short-term securities and cash having a value of $42,387,295 to its partners CLICC and CLICC GP as a distribution of partnership capital as in the December 2007 Transactions, paragraph 21-4 herein;
Effective at 3:00 p.m. (Eastern Time) on December 31, 2007, CLICC shall be deemed to have sold to CLICC GP its limited partnership interest in MAM LP in consideration of the issue by CLICC GP of the issue by CLICC GP of its common shares having a fair market value equal to the fair market value of CLICC’s limited partnership interest in MAM LP;
At the same time, CLICC GP shall be deemed to have issued to CLICC the requisite number of common shares to effect the purchase in subparagraph 2 and to have increased the stated capital account of its common shares by $1 pursuant to s. 24(3) of the OBCA;
That the acquisition by CLICC GP of CLICC’s partnership interest in MAM LP effective as at 3:00 p.m. on December 31, 2007 resulted in the cessation and dissolution of MAM LP by operation of law at that time;
That as at 3:00 p.m. (Eastern Time) on December 31, 2007, as a result of the cessation and dissolution of MAM LP, all the property, assets and liabilities of MAM LP becomes those of CLICC GP, effective at that time.
Rectification of the Winding Up of CLICC GP
As at 3:05 p.m. (Eastern Time) on December 31, 2007, CLICC GP shall be deemed to have paid a dividend to CLICC, its sole shareholder, in the amount of $423,873 in satisfaction of the assignment, transfer and conveyance to CLICC of short-term securities and cash of equal fair market value;
The special resolution of CLICC dated December 21, 2007 authorizing the dissolution of CLICC GP is deemed cancelled and null and void, nunc pro tunc;
Effective as at 11:59 p.m. (Eastern Time) on April 30, 2008, CLICC GP shall be deemed to have been wound-up and all CLICC GP`s property, assets and rights shall be deemed to be transferred to CLICC, effective as at that time.
[29] The Proposed Transactions still result in the dissolution of MAM LP on December 31, 2007. However, rather than MAM LPs assets being distributed to CLICC and CLICC GP in accordance with their interests prior to such dissolution, as occurred in December 2007, CLICC now divests its interest in MAM LP to CLICC GP for consideration. Because CLICC GP then owns all of MAM LP, it is wound up as a matter of law. On the wind-up, CLICC GP assumes all MAM LPs assets and liabilities. CLICC is subsequently wound up on April 30, 2008, more than 3 months after the dissolution of MAM LP. The consideration CLICC received from CLICC GP for its interest in MAM LP is less than its acquisition cost, thereby creating the loss for tax purposes to offset the foreign exchange gain from the Hedge Contracts.
The Law
[30] Rectification is an equitable remedy designed to correct a mistake in carrying out the settled intention of the parties as established by the evidence. It is a discretionary remedy which is not to be exercised lightly. It is not used to vary the intentions of the parties or to correct erroneous assumptions or beliefs as to what was intended. See: Wasauksing First Nation v. Wasausink Lands Inc. (2004), 2004 15484 (ON CA), 43 B.L.R. (3d) 244 (Ont. C.A.) at para. 81.
[31] Juliar involved the rectification of a corporate transaction to achieve the intended result of the parties which was that the transaction not be taxable. In upholding the decision of the motions judge allowing rectification, Austin J.A. on behalf of the Court, referred to and relied upon Re Slocock’s Will Trust, [1979] 1 All E.R. 358 (Ch. D.) which permitted rectification of a document legitimately designed to avoid the payment of tax in order to carry out the intention of the parties.
[32] Following Juliar, the doctrine of rectification has not been limited to rectification of contractual documents. Courts have utilized it to ensure that instruments evidencing corporate transactions comport with the actual intention of their creators. See: Amalgamation of Aylwards (1975) Ltd., Re, 2001 32734 (NL SC), [2001] N.J. No. 195 (T.D.); GT Group Telecom Inc. (Re), 2004 52533 (ON SC), [2004] O.J. No. 4289 (O.C.J. Com. List); Di Battista et al. v. 874687 Ontario Inc. (2005), 2005 51220 (ON SC), 80 O.R. (3d) 136 (S.C.J.).
[33] More recently, the principles of rectification involving a non-arm’s length corporate transaction were applied by Newbould J. in Fairmont Hotels Inc., et al v. A.G. Canada, 2014 ONSC 7302 (S.C.J.). Relying on Juliar, Newbould J. held that Fairmont Hotels’ always had the intention to carry out the transaction in issue on a tax and accounting neutral basis and accordingly rectified an internal unilateral share redemption to remedy an unintended tax assessment. An appeal of Newbould J.’s decision in Fairmont Hotels was dismissed by the Court of Appeal on May 17, 2015. See: 2015 ONCA 441.
The Position of the Parties
[34] CLICC submits that the court should rectify the December 2007 Transactions in order to achieve the intended objective of the parties, that is to realize a loss of approximately $168 million inherent in the tax cost of CLICC’s partnership interest in MAM LP in its 2007 taxation year. CLICC submits that all of the requirements for rectification as set out in Juliar are present in this case and accordingly the December 2007 Transactions should be rectified in accordance with the Proposed Transactions.
[35] The AGC submits that CLICC’s application amounts to retroactive tax planning which rectification does not relieve against. Accordingly, it should be dismissed. It submits that, having regard to three Supreme Court of Canada cases released after Juliar dealing with rectification (Performance Industries Ltd. v. Sylvan Lake Golf and Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678 (S.C.C.); Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157 (S.C.C.); and Quebec (Agence du Revenu) v. Services Environmentaux AES Inc., 2013 SCC 65, [2013] 3 S.C.R. 838 (S.C.C.)), Juliar is wrongly decided. The AGC submits rectification is restricted to correcting mistakes in the instruments used to implement a definite and ascertainable tax plan.
Discussion
[36] The evidence establishes and it is undisputed by the AGC that at all times, CLICC and the other parties to the December 2007 Transactions shared the common and continuing intention from the outset of the December 2007 Transactions that they would result in the realization by CLICC in its 2007 taxation year of a deductible tax loss of approximately $168 million inherent in its partnership interest in MAM LP. By mistake, the parties structured the December 2007 Transactions without including steps to address the application of s. 98(5) of the ITA.
[37] Based on the evidence, it is clear in my view that this is not a case of retroactive tax planning after the CRA audit and reassessment. The purpose of the December 2007 Transactions was always to create a taxable loss in the 2007 tax year in order to offset the unrealized taxable gain arising from the foreign exchange gains accrued on the Hedge Contracts in the same tax year.
[38] The AGC’s arguments before me against following Juliar and rectification being restricted to correcting mistakes in the instruments used to implement a definite and ascertainable tax plan were advanced by it before the Court of Appeal in Fairmont Hotels and rejected by the Court. The Court stated at para. 10 of its endorsement:
[10] Juliar is a binding decision of this court. It does not require that the party seeking rectification must have determined the precise mechanics or means by which the party’s settled intention to achieve a specific tax outcome would be realized. Juliar holds, in effect, that the critical requirement for rectification is proof of a continuing specific intention to undertake a transaction or transactions on a particular tax basis.
[39] As I have held, at all material times, CLICC and the other parties to the December 2007 Transactions had a continuing specific intention to carry out the December 2007 Transactions in order to create a tax loss in the 2007 taxation year of approximately $168 million to offset the accrued gain arising from foreign exchange on the Hedge Contracts. By mistake that did not happen. In the circumstances and based on Juliar, CLICC is entitled to rectification.
The Amendment Motion
[40] As noted, following the completion of the hearing of the application, CLICC brought a motion pursuant to Rules 14.09 and 26.01 of the Rules of Civil Procedure to amend the relief requested in its notice of application by setting out an alternative transaction which it submits achieves the same outcome as the Proposed Transactions but does so in a more efficient fashion by simply changing the date of the winding up of CLICC GP from December 31, 2007 to April 30, 2008 (the “Alternative Proposed Transaction”).
[41] CLICC submits that the Proposed Transactions it initially sought in its notice of application remains a “clear and valid exercise of the Court’s established equitable jurisdiction.” It advances the Alternate Proposed Transaction in response to the AGC’s argument that its Proposed Transactions contain two more transactions than occurred in the December 2007 Transactions and requests the amendment should it “be deemed necessary.”
[42] The AGC opposes the amendment motion. It submits that CLICC is merely trying to cooper-up its case, having heard the AGC’s arguments. To allow the amendment in such circumstances is improper and contrary to the rules of procedural fairness.
[43] Rule 26.01 provides that at any stage of the proceeding, the court “shall” grant leave to amend a pleading “on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.”
[44] As the amendment motion was brought while my decision was under reserve, the “proceeding” was still ongoing. Further, I do not consider that the AGC will suffer any prejudice from the amendment. It has been able to address all of its arguments against rectification sought by CLICC, whether by the Proposed Transactions or the Alternate Proposed Transactions.
[45] The AGC submits that the prejudice which arises is not to it but rather to the administration of justice in being able to seek an amendment to in effect “cooper up” the application after hearing the AGC’s arguments.
[46] Given, however, the mandatory nature of Rule 26.01 coupled with the fact that an amendment motion can be brought at any stage of the proceedings, amendments after argument to “cooper up” a claim or cause of action may be allowed. As long as there is a basis in the evidence for the amendment and no prejudice to the responding party that can’t be compensated for in costs or an adjournment, the amendment is permitted pursuant to Rule 26.01.
[47] My problem with CLICC’s amendment request is not that it results in prejudice to the AGC but rather that it is requested only if “such amendment be deemed necessary.” As I have held, CLICC is entitled to the relief requested in its notice of application. Accordingly, in my view, the amendment is not necessary and therefore should not be allowed.
[48] As a result, CLICC’s amendment motion is therefore dismissed.
Conclusion
[49] For the above reasons therefore, CLICC’s application for the relief set out in its notice of application is allowed. The draft order attached to CLICC’s January 5, 2015 factum to implement the Proposed Transactions is approved subject to adding my disposition concerning costs.
[50] Given that I have granted CLICC the relief it requested in its notice of application, its motion to amend its Notice of Application is not necessary and is accordingly dismissed.
[51] The parties have agreed that the successful party on the application is entitled to costs of $50,000. In my view, having regard to the issues, that amount is fair and reasonable. Accordingly, CLICC is entitled to costs of the application, fixed at $50,000.
[52] At the same time, the AGC was successful on the amendment motion and entitled to costs of the motion. Also in accordance with the parties agreement, those costs are fixed at $2,500.
L. A. Pattillo J.
Released: November 19, 2015
Appendix “A”
Investment in MAM LLC
Organization Chart
December 6, 2007
Hedge Partners
One hedge per bond
GWL
CLA
CLICC
C$56.25m debt
C$1,267.6m LP units
C$12.7m common shares
CLICC GP
C$18.75m common shares 99%
= 5.575% 1%
C$12.7m GP units
MAM LP
C$952.7m debt C$317.6m common shares
= 94.425%
MAM Holdings
C$1,082.0m debtCommon shares equal to C$263.3m
CANADA
USA
MAM LLC
M Hedges are related to these bonds
COURT FILE NO.: CV-14-10740-00CL
DATE: 20151119
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
IN THE MATTER OF Rule 14.05 (3) (7) of the Rules of Civil Procedure
BETWEEN:
THE CANADA LIFE INSURANCE COMPANY OF CANADA
Applicant
– and –
ATTORNEY GENERAL OF CANADA and HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO
Respondents
REASONS FOR JUDGMENT
PATTILLO J.
Released: November 19, 2015